The latest edition of The Economist includes a fascinating comparison of home prices with the estimated annual cost of renting the same home. Basically, this price-rent ratio is a way of describing the premium that people will pay to own a home.

Historically, the ratio hovered around 5 percent. In other words, a home that cost $300,000 could be rented for about $15,000 a year, or $1,250 a month. But by the peak of the market in 2006, the ratio had dipped to 3.5 percent. In oversimplified terms, the house in the first example could still be rented for about $1,250 a month, but it now cost about $429,000 to buy, a much larger ownership premium.

The history of this price-rent ratio was first calculated in 2007 by a professor at the University of Wisconsin-Madison and two researchers at the Federal Reserve Board of Governors. You can read their highly technical paper on the subject. Or you can just look at the graph, which summarizes their work, courtesy of the Calculated Risk blog.

The downward trend in the price-rent ratio basically reflected an increase in the perceived value of home ownership. As you'll recall, that was caused by the widespread belief that home prices would continue to increase. Home ownership itself was pretty much the same nice thing it had always been. But ownership as an investment suddenly looked a lot more lucrative. Stock prices work the same way: The cost of a share doesn't reflect the present value of the company, it reflects how much you think the company is going to be worth, plus competition from other buyers.

What does it mean for the future? The Economist argues that the price-rent ratio will return to its historic equilibrium. It says that would take about another 18 months of national price declines erasing another 15 percent of the value of the average home.

Obviously these numbers are not specific to Boston, where things are better than the worst markets but worse than the best markets, but I am struck by the number of recent comments from readers who see a better value in renting than in buying.

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